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Firmer prices, tighter supplies

Peg Zenk | Dec 01, 2009

IT HAS been a frustrating year for anyone buying fertilizer. Both dealers and growers, still stinging from high-priced purchases in 2008, watched prices drop by half this year. And many have vowed to hold off making future purchases as long as they can.

The unprecedented lack of buying throughout the 2009 season caused many fertilizer manufacturers to cut back on their production, which emptied supply pipelines for most products. This past year's late growing season and delayed harvest made buyers skittish through the fall. This winter, growers will face unusually low inventories at both the manufacturer and dealer levels.

Retailers have learned some hard lessons this past year, says Keith Swanson, with dealer risk management services, CHS. “Having to write off high-priced inventory from last year has caused many dealers to change their whole approach to inventory management,” he says. “They now recognize that the risk is too high to have much unsold product sitting in the bin.”

Cooperative boards and dealer management now restrict the amount of product a dealership can buy without having back-to-back contracts with growers. “Many aren't buying any product unless they have a signed grower contract first,” Swanson says. “As a result, product pipelines were drained for most product types this fall.

“Farmers are probably used to the industry saying ‘the sky is falling’ and they might not be able to get all the product they need unless they buy ahead, but this could be the year that really happens. If growers don't lock in most of their fertilizer purchases this winter, they might not get what they need for spring.”

Possible spot shortages

“I don't expect there will be major fertilizer shortages, but there could be spot shortages, based on limited dealer storage,” says Dan Froehlich, director of agronomy for Mosaic Company.

He notes that dealers in the eastern Corn Belt, in general, tend to have less on-site storage than dealers farther west, so short-term supplies could be tighter there. “Everyone is worried about price, but supply could definitely be an issue this spring if too many farmers wait to buy,” he says.

Swanson agrees. “The whole supply picture is complicated by the bad weather and limited fall application season. That will push more nitrogen application to spring and sets up the possibility of application and supply gridlock.”

That could be felt the most in states like Illinois, where a large fall application is the norm. “Growers here typically put down 60 to 70% of their total nitrogen in the fall,” says Jean Payne, president of the Illinois Fertilizer and Chemical Association. “This past fall, as well as in 2008, growers haven't been able to apply anywhere near that usual level of nitrogen. That's going to put a lot more pressure on spring application.”

Faster ways to apply

Froehlich says that, for spring, growers will probably need to get as much fertilizer applied as quickly as possible. “I would expect more need for broadcast application,” he says.

Although growers have been more interested in urea ammonium nitrate (UAN) this past fall, due largely to it being the lowest-cost nitrogen product on a per-pound basis, urea will remain the dominant nitrogen source because of its application flexibility, Froehlich says. “Long term, the availability of UAN could be a limiting factor, and ammonia is difficult to carry over, as we've seen this past year,” he states.

From an agronomic standpoint, growers should work through several fertilizer scenarios for spring, based on realistic yield goals. “You should have a backup plan in case you don't have enough time in spring to get all your preplant fertilizer applied, or if prices go up again, or if potash prices go down,” Froehlich advises. “Growers need to consider all the possibilities and know how they'd react. Then they need to talk with their dealer.”

Matching rates to hybrids

Froehlich says that most growers haven't changed their fertility practices much in the past five years. They assume new hybrids and varieties have the same nutrient requirements as they always have, but that's not necessarily the case. “Many of today's hybrids have become much more efficient at using nitrogen,” he explains. “We used to figure that you needed between 1 and 1.2 lbs. of N per bushel of yield, but some new hybrids require just 0.8 to 0.9 lbs. of N per bushel.”

The flip side, he says, is that new hybrids yield so many more bushels that growers may need to adjust nitrogen rates up, based on current projected yields.

The rate cutting that has taken place over the past two years, primarily due to high phosphates and potash prices, has drained soils in many areas, Froehlich adds. “This year's high-yielding crops have, in some ways, masked the situation,” he says. “Growers got great yields, even with lower P and K levels. But we're getting down to critically low levels this year, and growers need to make the investment in replenishing those nutrients.”

Buying means contracts

How you buy those nutrients may have changed this past season, though. “Reduce financial risk” has become the mantra for most fertilizer dealers, and the main way they are doing that is through grower contracts. Most won't sell product without one now. Their lenders are requiring it.

“Dealers are also adding possible storage costs into those contracts, which kick in if the grower doesn't take receipt of the product at the agreed-on time,” Payne says.

But growers are not without their own risk management tools. “Farmers need to know that the just-in-time buying method probably won't work this year; they're not likely to get what they want when they want it,” Swanson says. “So they should consider making prepay purchases yet this year if they need the expenses for '09 taxes.

As for the extreme price run-ups seen last year, Swanson says they were an aberration that we're not likely to see again. He says, “The fertilizer markets are now trading much closer to the cost of production, which should reduce the overall level of volatility we see in the markets in 2010.”

Sidebar 1: Global impact

The fertilizer industry is now a global one, with the United States importing about 66% of its urea needs alone. What happens in other countries and in other markets can have a major impact on the availability of product in the U.S. and the prices farmers pay.

Keith Swanson, with dealer risk management services, CHS, says these are some wildcard factors that could impact U.S. fertilizer markets in the coming year:

What China buys and sells

This country's role in world fertilizer markets has changed dramatically in the past decade, shifting it from an importer of phosphates to a major exporter. China remains a major buyer of potash, so much so that world markets are now waiting for it to sign its annual import contracts with potash producers in order to help establish a global price in the otherwise stagnant market.

What South America plants

Argentina and Brazil have been steadily increasing their planted acres in recent years. Brazil, alone, is expected to plant 58 million acres of soybeans in the 2009/2010 season, which will probably make the economics of corn better for U.S. producers. The country also currently imports about 70% of the fertilizer it consumes but is looking to increase its domestic production in the coming decade.

Extremes in other commodities markets

From a macro perspective, extreme highs or lows in major commodity markets could affect the price of crop nutrients, Swanson says. “The value of the dollar is a good example. If the value of the dollar would move sharply higher in the months ahead, grain and crop nutrient markets would likely move lower,” he says.

How grain markets move

After the recent collapse in crop nutrient pricing, the fertilizer markets have been more closely tied to the grain markets. That will probably continue in the years to come, Swanson says.

Next Page: Sidebar 2: New formulations

Sidebar 2: New formulations

Mosaic's MicroEssentials Mosaic Company says that its new phosphate fertilizer blend, packaged in an impregnated granule, can provide growers with more consistent application and nutrient distribution. MicroEssentials is available in three formulations, all with added sulfur and one with zinc.

By packaging nutrients together in a layered granule, you get a lot of positive interactions, says Dan Froehlich, director of agronomy for Mosaic Company. “Sulfur helps with nitrogen uptake, while zinc helps with phosphorus uptake.”

He says the product works especially well on sandier soils and those with higher pH. “There may be enough organic sulfur in the soil, but if it's not available to the crop early enough in the season, plants can be stressed. MicroEssentials provides that early season boost to young plants, especially in cooler, wetter springs.”

If growers are already applying a MAP-zinc-sulfur blend, they will definitely save money by using MicroEssentials, Froehlich says. “If you only use straight MAP, you need to get a 1½- to 2-bu. yield increase to pay for the technology. In controlled research trials, we see 9- to 10-bu. yield increases. A 5-bu. advantage is very common.”

The benefits aren't just limited to corn. “Most of the soybeans on which MicroEssentials have been applied have been Roundup Ready beans, and our zinc product seems to help reduce the manganese-induced deficiencies that can appear in some Roundup Ready soybean varieties,” Froehlich says.

Safer ammonium nitrate Honeywell says it has developed an ammonium-nitrate-based fertilizer with significantly lower explosive potential. The new technology, called Sulf-N 26, fuses ammonium sulfate with ammonium nitrate to provide plants with nitrogen and sulfur in a product that is easier and safer to handle and store.

“The unique composition of this new fertilizer makes it extremely difficult to turn into a weapon,” says Qamar Bhatia, vice president and general manager, Honeywell Resins & Chemicals. In independent testing, the new product was mixed with fuel oil — a common method of using ammonium nitrate as an explosive — and it did not detonate.